Yahoo closes $7.6 billion deal with Alibaba Group

September 19, 2012

SAN FRANCISCO - Yahoo has completed a long-awaited $7.6 billion deal with China's Alibaba Group, generating a windfall that could help ease the pain of Yahoo shareholders who have endured the company's foibles during the past few years.

After Yahoo distributes most of the proceeds to its shareholders, its recently hired CEO Marissa Mayer will still have an extra $1.3 billion to finance acquisitions or hire new talent as she tries revive the company's revenue growth.

Tuesday's resolution comes four months after Yahoo Inc. and Alibaba Group Holding Ltd. outlined the details of a complex transaction that took more than two years of on-again, off-again negotiations to hammer out. The deal will give Alibaba greater autonomy as it prepares to pursue an initial public offering of stock within the next three years, while rewarding Yahoo for one of the few moves that has gone right for the troubled company in the past few years.

Yahoo paid $1 billion for a 40 percent stake in Alibaba in 2005 and is now reaping a huge return. Alibaba is paying $7.1 billion in cash and stock to buy back half of Yahoo's holdings. Another $550 million is being paid to Yahoo under a revised technology and patent licensing agreement with Alibaba.

After paying taxes, Yahoo estimates it will pocket about $4.3 billion to supplement the $1.9 billion in cash the company had as of June 30.

Yahoo, which is based in Sunnyvale, Calif., plans to spend about $3 billion of the Alibaba proceeds buying back its own stock in the upcoming months, leaving Mayer with some financial flexibility to pay for other items on her turnaround agenda.

"This yields a substantial return for investors while retaining a meaningful amount of capital within the company to invest in future growth," Mayer said in a statement.

The decision on how to handle the proceeds may have reflected a compromise between Mayer and Yahoo's board.

Before hiring Mayer away from Google in July, Yahoo had pledged to distribute virtually all of the proceeds from the Alibaba sale to its shareholders.

But the company wavered from that stance last month when it filed regulatory documents disclosing that Mayer was considering holding on to the money to help carry out her vision for Yahoo. Without providing specifics, the documents said Mayer was mulling possible acquisitions.

Analysts have speculated that Mayer may try to make a big splash by putting together a takeover offer for one of the Internet's hot websites, such as online scrapbook Pinterest or check-in service Foursquare

Another big payoff looms for Yahoo when Alibaba goes public, an event expected by the end of 2015. Alibaba, which owns China's version of eBay and e-commerce sites, has the right to buy back half of Yahoo's remaining 23 percent stake before the IPO. Yahoo then could chose to sell its remaining Alibaba stock after the shares begin trading.